Across the Nation

The Colorado Pot Tax: How Other States Can Learn From America’s Pot Pioneers

The Colorado pot tax is a modern experiment in the American tax system. For this experiment, the hypothesis was an estimation of how much tax revenue would be gained from the legalization of marijuana in Colorado. The initial revenue predictions were generous: State experts estimated $67 million in tax revenues for 2014 (with the governor’s office estimating upwards of $100 million). Now, the much-anticipated numbers are in and they aren’t even close to the predictions. In 2014, Colorado raised $44 million in tax revenues for the state.

Here’s a quick look at the reasons for this shortfall and what other states can do to be successful as they follow in Colorado’s footsteps.

Why Did the Estimated Revenue Fall Short?

With almost a $23 million shortfall, many people are questioning where predictions went wrong. However, as the first state in the nation to successfully legalize, tax, and regulate the cultivation, processing, and sale of marijuana, it is important to remember that the $67 million estimate was really just that, an estimate.

The reality is that the experts’ estimations didn’t consider the fact that legalization wouldn’t kill the black market, which is the biggest supplier of the drug around the country. Approximately 40 percent of sales in 2014 were illegal, and there are several reasons why.

High taxes such as a 15 percent excise tax for sellers, a 10 percent state retail tax, another 2.9 percent state sales tax, and various city, county, and local taxes and fees, all drive consumers to the black market

The new law allows Colorado residents to grow their own marijuana and to give it away, and neither transaction is taxed

Other states struggling for revenue saw dollar signs when the actual sales tax numbers for Colorado were tallied. These political pioneers on the frontier don’t see the reduced estimates as a failure; instead, they view the revenue as money that they didn’t have before the ban on recreational marijuana.

Finding Balance

With the marijuana tax revenue coming up short, it is clear that the plan has room for improvement. The Colorado pot tax can be successful across the nation if states work together to find a balance. It’s important for states to:

States that discourage medical marijuana misuse and fraud, and those that crack down on the strength of the black market will see more revenue. As more states follow Colorado’s lead, states will be competing against each other for sales.

It’s anyone’s guess as to which state will legalize recreational marijuana next, and 17 additional states have introduced or prefiled legislation to legalize and regulate the plant. Keeping an eye on what works—and what doesn’t work—in Colorado, will allow other states to learn what it takes to successfully garner some green from their greens.